A Journal by the Keck Center for International and Strategic Studies at Claremont McKenna College

Gary Hufbauer on TPP-11

Hufbauer has written extensively on international trade, investment, and tax issues. He is coauthor of Bridging the Pacific: Toward Free Trade and Investment between China and the United States (2014), and has contributed or authored more than a dozen other books. Gary Clyde Hufbauer, Reginald Jones Senior Fellow since 1992, was formerly the Maurice Greenberg Chair and Director of Studies at the Council on Foreign Relations (1996–98), the Marcus Wallenberg Professor of International Finance Diplomacy at Georgetown University (1985–92), senior fellow at the Institute (1981–85), deputy director of the International Law Institute at Georgetown University (1979–81), deputy assistant secretary for international trade and investment policy of the US Treasury (1977–79), and director of the international tax staff at the Treasury (1974–76). He was interviewed by Tobin Hansen '20 in Feb. 2018.

On his first day as US President, Donald Trump signed an executive order withdrawing theU.S. from the Trans-Pacific Partnership (TPP). What does the withdrawal mean for the USeconomy and for US influence in Asia?

US influence in Asia has four main components. First there is US military presence. We have the 7th fleet
based in Asia and forces stationed in Japan and Korea. US military involvement buffers against Chinese
expansion in the region. The second component is foreign investment. We have significant investment in
Asia, with many US companies investing heavily in Korea, Japan, Indonesia, and Thailand. There is also
a great deal of inward investment from these same countries. A third area of influence is through the US
dollar, which is still the primary international currency that all the major Asian countries hold in large
quantities through dollar-denominated US treasury bonds. The heavy dollarization of Central Banks and
major private banks in Asia enhances US influence. The fourth component is trade. Existing US barriers
to merchandise are pretty low; the average tariff is 2.5 to 4 percent. Tariffs in the other TPP countries are
not terribly high, but a few have significantly higher tariffs, such as Malaysia and Vietnam. We already
have Free Trade Agreements (FTAs) with Australia, Singapore, Peru, Mexico, Canada, Colombia, and
Chile, so tariffs are also quite low with those countries. This means that relative to other TPP countries,
the US was not significantly exposing its industries to more foreign competition than they already faced
through tariff policy. The same limited exposure holds for the US service sector. Other countries did
liberalize to a greater extent because their barriers were previously higher, as in the cases of Malaysia,
Vietnam, and Japan.

From an economic standpoint, the model we used at the Peterson Institute, created by Professor Plummer
and Professor Petri, indicated that after a 10 year period, when TPP obligations were totally phased in, the
US economy might be $130 billion richer each year. The growth stemmed from extended multi-
directional trade with the other TPP countries. While $130 billion is not a large number given the size of
the US economy, it is significant compared to other things the US government might do to enhance
economic growth year after year. The government is not very effective at boosting growth outside of
direct budget expenditures or Federal Reserve monetary ease. That potential for growth from TPP is now
out the window, thanks to the US not participating. In terms of additional losses, now that TPP is going
forward without the US, American firms that export to TPP-11 countries will face standard tariffs and
non-tariff barriers while the TPP-11 members will have reduced tariffs, marginally disadvantaging US
firms operating in Asia.

There are also significant diplomatic effects of this decision. It came as a great shock in Asia that the US
would pull out of TPP after pushing so hard for it during the last years of the Obama administration. If the
US wants to deepen its engagement in Asia, this decision creates a lot of doubt among Asian leaders
about whether negotiating with the US is a productive exercise. Negotiations for TPP were very
extensive, with about 25 negotiating rounds and with many countries making difficult concessions to US
demands. Now there is nothing to show for it in terms of US-Asia relations. It also changes how future
negotiations between the Trump administration and Asian leaders will be received. Moreover, receding
US involvement means a relative rise of Chinese influence in Asia.

To the surprise of many, the eleven remaining countries announced in January of this year thatthey will sign an amended trade agreement, the TPP-11 in March in Chile. What are some of thekey changes or additions found in the current version?

Actually, I would not consider this decision to be a surprise to those at the Peterson Institute. We often
met with foreign trade officials and ministers from Asia and it was clear that Japan had invested a lot in
this undertaking. For a long time, Japan was standoffish toward bilateral and regional trade agreements,
but now it is embracing them in large part due to Japan’s geopolitical contest with China. In discussions
with trade ministers from New Zealand, Peru, and Chile, there were many indications that they wanted to
go ahead with the TPP deal. The real question was how much renegotiation they were willing to do, given
that re-opening the text would take time and many of these nations were anxious to see progress. With
Japan taking a leadership role, they decided to take the text mostly as is, save for a few provisions that
were concessions to the US that the other member nations did not much like. Those concessions are now
gone. One of the more significant provisions was an extension of copyright protection to 75 years beyond
the life of the creator when the international norm is the life of the creator plus 50 years. That 75-year
protection is now gone. Another provision that specifically concerned US drug companies was the term of
biotechnology research data protection. Drug companies wanted to protect data relating to safety and
efficacy of new drugs for a significant period so that competitors cannot use that data to expedite their
own approvals and undercut the initial firm. After all, when a research process is long and expensive, the
absence of data exclusivity can significantly change the prospective payoff from research and
development. Those are the two largest measures that were cut out of TPP-11, but there were also a few
others. One of them concerned labor standards in Vietnam. The US insisted on quite strong provisions on
labor. Previous US trade deals contained weaker language that called for “consultation” as opposed to
“dispute resolution” surrounding discrepancies between a particular nation’s labor practices and the
international agreements to which they adhere. Another area weakened by the US withdrawal was
environmental regulation. While the US is not usually the one to bring up carbon due to partisan
disagreements surrounding the causes on global warming, the US had insisted on strong dispute
resolution provisions relating to environmental standards. These provisions are now gone. The TPP-11
stripped away these provisions since they were brought in at the insistence of the US. If the US were to
attempt reentry to TPP-11, it would already require some heavy lifting to resurrect them.

Without the United States’ participation, does the TPP-11 have a leadership vacuum? Cananother country, such as Japan, take on this role?

Japan is the one. Japan has negotiated very modest trade agreements with Korea and China, but Japan has
not been a pioneer in bilateral or multilateral trade agreements for very long. Japan recently signed a trade
agreement with the EU, which was considered a relatively modest deal, but still a big step forward. To
enhance its new leadership role, Japan will have to follow through on opening its markets, specifically in
agriculture. It will also have to continue a large bilateral assistance program of grant aid and export
credits for large infrastructure projects. Japanese leaders see that approach as the best response to China
in the economic space. This is preferable to competition in the military space. Canada could possibly play
a larger role, since it is the second largest economy in TPP-11, after Japan. However, Canada lacks the
market strength and investment connections that Japan has.

Prime Minister Shinzo Abe has supported TPP but still faces factional difficulties. Some of the TPP
countries, such as Australia, have very strong agriculture sectors that can compete heavily with Japan,
especially in beef and dairy. If Japan wants to take on economic leadership, it will have to continue to
liberalize its agricultural sector, despite internal opposition from rural areas. Over a decade or more, this
would likely lead to greater specialization in uniquely Japanese products, like Kobe beef and regional
vegetables and move Japan away from bulk agricultural products.

Like the United States, China is absent from TPP-11. What are the implications of the signingof the TPP-11 in March for China? How will China engage with this new trading bloc?

This is a real challenge for China. Even leaving aside the enormous geopolitical aspects, the challenges
that China would face to join the TPP bloc are substantial. Specifically, China is highly protective of its
digital industries, implementing policies that are antithetical to the TPP. First of which is the digital wall
that China uses to block access to online content that the Party does not want the people to see. That
directly contradicts the free access to information that is endorsed by the TPP. Second, Chinese leaders
want any servers that manipulate data on Chinese consumers to be located within China. The government
does this because it wants the jobs, and because it feels more secure by virtue of having the servers
handling data, specifically financial data, located within China. These security concerns are misplaced,
because foreign intelligence services can get hold of any of the data regardless of the location of servers.
Next, China’s state-owned enterprises are actively bolstered by President Xi Jinping, which does not fit
well with the TPP model. In terms of investment, all countries have some restrictions, but China has more
restrictions on inward investment than most other countries. China has intentionally left unclear the tests
by which it evaluates inward investment in order to more easily block potentially unwanted investors.
China wants to be influential in Asia, economically and politically, with most of the country’s external
efforts centered on the Belt and Road Initiative. China is willing to supply both construction expertise and
money to neighboring countries that want to be linked to China through the Belt and Road framework.
That is a different kind of initiative than a free trade agreement, focusing on investment projects rather
than market liberalization. In addition, China is leader, along with ASEAN, in the Regional
Comprehensive Economic Partnership (RCEP), which includes many TPP countries, most notably Korea,
India, and all the ASEAN countries. The terms are still pretty fluid, but it will look less like TPP and
more like a partnership agreement. The Belt and Road Initiative and the RCEP are China’s two primary
responses in the economic space. In the near term, China will likely pursue these other alternatives rather
than seek admission to the TPP-11.

How does Canadian and Mexican participation in the TPP-11 change their positions or statuswithin current NAFTA negotiations?

I was listening carefully to Trump’s State of the Union speech in order to see how much would be said
about trade, and there was surprisingly little. Given Trump’s prior rhetoric, I expected that he would take
the opportunity to blast previous trade agreements, but he didn’t do that. Instead he stressed code words,
“reciprocity” and “fairness,” things he claims were missing from previous trade agreements. He didn’t
repeat previously tweeted statements that NAFTA is a joke and that he is prepared to walk away. Thus, by
Trump standards, the State of the Union address was conciliatory on trade. On the other hand, when we
look at what the President wants from NAFTA, his demands are very aggressive and he has not backed

off from key proposals that he says will rebalance the agreement. Prime Minister Trudeau stated that
Canada can walk away from NAFTA if Trump continues to view this renegotiation strictly from the
perspective of reducing trade surpluses. Canada, in particular, strongly opposes US demands that dispute
resolution provisions be dropped from NAFTA – those dealing with trade remedies (Chapter 19) and
those dealing with investment claims (Chapter 11). These mechanisms are a red-line for Canada. The
leadership in both Canada and Mexico are prepared to see NAFTA enter a zombie phase, rather than
accept bad terms. A suspension of negotiations under threat of termination – if the US doesn’t get what
Trump wants -- would put a cloud over NAFTA, but it wouldn’t immediately terminate NAFTA
provisions. This approach would allow Trump to play to his political base without facing the backlash
from US stakeholders who would be hurt by the termination of NAFTA. Many business firms and 35
Republican senators have forcefully informed Trump that they like NAFTA and want it to stay. With
respect to Canada and Mexico, TPP is now a big focus and is something they will want to strengthen. So
even if the US pulled out of NAFTA, they would they would seek to keep the best of TPP or NAFTA
terms as the trade framework for Canada-Mexico two-way trade and investment.

Do you think that the United States will try to re-enter the TPP-11 under the current presidentor under future presidents? If so, what would that process look like? How receptive would theremaining 11 members be to that effort?

I heard one prominent advisor in Washington predict that Trump may make statements pushing to rejoin
TPP-11. Given how often Trump does surprising things, it’s possible. One problem is that the President’s
record has destroyed confidence. Moreover, anything he negotiates could fail in Congress, especially
because many Democrats in the progressive wing disfavor trade agreements as much as Trump does,
admittedly with less hostile rhetoric. Senators Warren, Sanders, Brown, and even Schumer have all said
hostile things about trade agreements. It's hard for me to see this administration entering a trade
agreement of any significance because people in Trump’s base are now conditioned to thinking that trade
deals are not good for the United States and cause significant job losses. Trump is going to ask for a
renewal of Trade Promotion Authority in April, which I think he will get because Republicans in the
House or Senate will not want to slap him in the face by voting it down. That would give him the
authority to negotiate new deals until 2021. But domestic legislative authority is one thing and foreign
willingness to negotiate on Trump’s terms is quite another. Subsequent renewal of TPA in 2021 does not
look very easy given current political attitudes. While there may be a significant shift, both Obama and
Bush had to work very hard to get trade promotion authority. The next President will have to invest a fair
amount of political capital to secure domestic authority, even before beginning to negotiate a deal. That is
a significant hurdle. I imagine that the other TPP-11 members would welcome the US back into the
framework, but they would not want to make many concessions. At the moment, however, the US itself
lacks the political will to join TPP-11.

Tobin Hansen CMC '20Student Journalist

Bali, Indonesia (October 8, 2013) U.S. Secretary of State John Kerry participates in a meeting with nations’ leaders discussing the Trans-Pacific Partnership (TPP). [State Department photo by William Ng/Public Domain]